Past Research
Publications – 1997-2003
Some can be downloaded: click title to download Acrobat file.
1997-2003 2004-forthcoming Full list of publications
2003
Gianni De Fraja and Fabio M. Manenti, "How Long is a Piece of Cable? Equilibrium Determination of Local Telephone Areas",Journal of Economics, 79, 2003, pp 61-85.
Abstract
This paper studies the endogenous determination of the nature of telephone calls, namely whether they are local or long distance. Calls between users in the same local calling area are local, and we allow the extension of this area to be treated as a strategic variable. We show that the extension of the calling areas which maximises the carrier's profit is the same that a welfare maximising regulator would choose. Under a price cap regime in which prices are required to meet an average price constraint, the firm is shown to manipulate strategically the extension of the local calling areas. We end the paper by considering the case of a competitive market. In this case, again, the owner of the local loop extends the local calling areas in response to decreased efficiency or increased competition of its competitors.
Appendices (containing all the calculations)
1: pdf file - MapleV file .mws (this can be run).
2: pdf file - MapleV file .mws (this can be run).
2002
Gianni De Fraja, The Design of Optimal Education Policies, The Review of Economic Studies, 69, 2002, pp 437-466.
Abstract
The paper studies the optimal education policy of a utilitarian government. Households differ in their income and in the intellectual ability of their children; income is observed by the government, but ability is private information. Households can choose to use private education, but cannot borrow to finance it. The optimal education policy we derive is elitist: it increases the spread between the education achievement of the bright and the less bright children, compared to both private provision and the first best policy. It is also such that the education received by less bright children depends positively on their parental income. Finally, the optimal education policy is input regressive, in the sense of Arrow (1971): households with higher income and brighter children contribute less in tuition fees towards the cost of the education system than households with lower income and less bright children. The government can finance education with income tax, but at the cost of blunting the individuals’ incentive to exert labour market effort.
1998 Draft (C.E.P.R. Discussion Paper 1792)
Dieter Bös and Gianni De Fraja , "Contracts for Health Services: Quality versus Excess Capacity" , Journal of Public Economics, 84, 2002, pp. 199-218.
Abstract
This paper studies the effects of non-contractability of investment on the choices made by a health authority and the hospital with which it contracts for the provision of a specific service. We deal with a situation where the parties must write a short-term contract, that is, where they are prevented from signing a contract before making their investment choices. For this reason inefficiency emerges: the service quality chosen by the hospital is too low, and the health authority relies too much on outside providers.
Gianni De Fraja and Damiano Silipo, "Product Market Competition, R&D, and Welfare", Research In Economics; 56, 2002, pp. 381-397.
Abstract
We compare the subgame perfect equilibrium emerging in four regimes of R&D competition between duopolists: (i) full competition, (ii) coordination of research strategies, (iii) joint venture with cross licensing of patents, and (iv) full collusion in R&D and the product market. The outcome of the firms’ interaction depends on the interplay of the degree of product market competition, the similarity of the research strategies, and the cost of R&D, relatively to market size. Our main result is that each of the four regimes can, for plausible parameter combinations, yield the highest level of welfare. Therefore it is problematic to draw general rules applicable to all proposed research joint ventures.
Appendix (zip file)
Gianni De Fraja and Elisabetta Iossa, Competition among Institutions and the Emergence of the Elite University, Bulletin of Economic Research, special issue on the “Economics of Education”, 54, 2002, pp. 275-293.
Abstract
We consider an environment where two education institutions select the proportion of their funding devoted to teaching and research and the criteria for admission for their students, and where students choose whether and where to attend university. We study the relationship between the cost incurred by students for attending a university located away from their home town and the equilibrium configuration that emerges in the game played by the universities. Symmetric equilibria only exist when the mobility cost is high; whereas when the mobility cost is close to zero, there is no pure strategy equilibrium. In the final section of the paper, we specify the general model, and show that asymmetric equilibria exist for a plausible and robust set of parameters.
Gianni De Fraja and Richard Romano, The Economics of Education: Editors’ Introduction, Bulletin of Economic Research, special issue on the “Economics of Education”, 54, 2002, pp. 205-208.
Gianni De Fraja, La regolamentazione delle tecniche di aggiudicazione degli appalti e delle concessioni: il caso italiano (The Legal Framework for Public Procurement in Italy), in Mario Baldassarri, Giampaolo Galli and Gustavo Piga (eds.), La competitività in Italia (Competitiveness in Italy), Il Sole 24 Ore, Milano, 2002, pp 228-255.
2001
Gianni De Fraja, Private and Public Schools: Theoretical Considerations, Lavoro e relazioni industriali, 2/2001, pp. 49-82..
Abstract
I present in this paper some of the conceptual problems posed by the existence of private education institutions. I begin by focusing on the effects on the growth rate of the economy and on its effects of equality and social mobility. In the second part of the paper I study how private and public schools compare in terms of performance, and, in the last part, I investigate how they interact when they compete with each other.
Gianni De Fraja, Education Policies: Equity, Efficiency, and Voting Equilibrium, Economic Journal, 111, 2001 pp. C104-119.
Abstract
This paper investigates the effects of specific forms of intervention in the market for education. The focus is on the redistributive effects of ability tests for admission to university and of a subsidy to tuition fees financed through general taxation. Both these measures enhance equality of opportunity, but their equity and efficiency effects are ambiguous. This ambiguity is reflected in the political economy equilibrium which would emerge as the result of voting on the level of the ability test and of the subsidy.
Gianni De Fraja and József Sákovics, Walras Retrouvé: Decentralized Trading Mechanisms and the Competitive Price, Journal of Political Economy, 109, 2001, pp. 842-863. (Appendix).
Abstract
We extend the standard analysis of decentralized markets to allow for the possibility that traders interact simultaneously with more than one trader on the opposite side of the market. In contrast with the literature, we reconcile the Walrasian equilibrium with the outcome of decentralized strategic trade: we show that there exist generic matching technologies which determine local market conditions such that, as market frictions vanish, the equilibrium price is the one that would result in the static Walrasian market. Our analysis highlights the importance of local market conditions for the determination of equilibrium prices.
Gianni De Fraja and Paola Valbonesi, Revenue Sharing Rules in International Telephony; Journal of Regulatory Economics, 20, pp. 5-20.
Abstract
The main method for settling telecommunications payments between operators in different countries is the reciprocal accounting rate system. This is a discriminatory system, as different operators pay different prices to access to the same national network and these price differences are not related to different costs of providing the service. Reforms of the accounting rate system are currently under discussion in international organisations. In this paper we study the effects of the existing regime and of the main alternative proposal (the international traffic terminating fee) on the retail price of international telephone calls. Our main result is that the current regime of reciprocal accounting rates determines lower prices than the proposed alternative system.
Gianni De Fraja and Alberto Iozzi, "Short Term and Long Term Effects of Price Cap Regulation", International Journal of Developing Planning Literature, 16, 2001, pp. 51-59; special issue on “The Telecommunications in the 21st Century” edited by William J Baumol and Victor A Beker.
Abstract
This paper uses a very simple example (two goods, linear symmetric demand and cost) to study the effects of the price cap regulatory mechanism. We show that if a given price vector is preferred (using current welfare as the criterion) to another, then it is not necessarily the case that it is also preferred in the long run (using the presented discounted value of welfare as the criterion). The relationship between current welfare and profit and therefore the firm's incentive to bargain for a given price vector depend on the specific details of the mechanism considered.
Gianni De Fraja, Competizione in mercati regolati: recenti sviluppi teorici (Competition in Regulated Markets: Recent Theoretical Developments), Rivista di Politica Economica, 91/2, 2001, pp. 47-77.
2000
Gianni De Fraja and Abhinay Muthoo, Equilibrium Partner Switching in a Bargaining Model with Asymmetric Information, International Economic Review 41, 2000, pp. 849-869;
Abstract
We study a model in which the seller of an indivisible object faces two potential buyers, and makes an offer to either of them in each period. We find that the seller's ability to extract surplus from them depends crucially on the value of the cost of switching from one buyer to the next. If the seller is pessimistic about the buyers' valuations, and there is a switching cost however small, then the market is a natural bilateral monopoly: the second buyer is never called on. If the switching cost is zero, or if the seller is optimistic, then switching, and possibly recall of the original buyer, may occur.
Gianni De Fraja, Contracts for Health Care and Asymmetric Information Journal of Health Economics 19, 2000, pp. 663-677.
Abstract
The paper presents a general model of contracting for a specific health service. The benefit of this service differs across patients; a purchaser (NHS, insurer) offers a contract to providers (hospitals, GP's), under the constraint of limited information about the provider's costs; the contract specifies payment as a function of the number of cases treated. A number of features of the optimal contract are derived. Some of these are surprising: for example, under plausible conditions, the price per case increases with the efficiency of the provider.
Gianni De Fraja, On Some Issues in the Theory of Competition in Regulated Markets, in George Norman and Jacques Thisse (eds.), Market Structure and Competition Policy: Game-theoretic Approaches, Cambridge University Press, 2000, pp 191-214.
Abstract
This paper studies how the standard model of regulation can be applied to markets with actual or potential competition. In the presence of multiple potential suppliers competition can be symmetric (all suppliers are treated similarly by the regulator), or asymmetric (some suppliers are in different position: usually this is a privatised firm, which has a dominant position in the market, often because of ownership of a bottleneck input). One form that competition can take is an auction for the right to be a monopoly supplier of a good. This case is studied when the regulator is also concerned about the quality of the product. The paper ends by showing how potential competition can improve the efficiency of bilateral relationships typical in bilateral procurement by alleviating the hold-up problem.
1999
Gianni De Fraja, Minimum Wage Legislation, Work Conditions, and Employment, Economica, 66, 1999, pp. 473-488.
Abstract
We analyse the effects of minimum wage legislation with the assumptions that firms are able to alter the working conditions of their employees, and that workers have different preferences about the characteristics of their job. Our main findings tally with Card and Krueger's (1995) recent somewhat puzzling empirical evidence about the effects of changes in minimum wage: we find that the effects of changes in the minimum wage on employment are limited, that there is a positive spillover on high wage workers, and that there is bunching of workers at the minimum wage.
Gianni De Fraja and Indrajit Ray, Slot Allocation: A Model of Competition between Firms when Consumers Are Procedurally Rational, Mathematical Social Science, 38, 1999, pp. 71-81.
Abstract
We present a simple model of competition between firms who face boundedly rational consumers. The consumers cannot compare two consumption bundles; instead, they have some fundamental preferences and a selection procedure. In any Nash equilibrium of the slot allocation game, the firms choose the same allocation. There may be multiple equilibria, one of which is always to allocate according to the consumers' tastes. Finally, as the number of firms increases, only the allocation preferred by the consumers remains as an equilibrium, which may not maximise the industry profit.
Gianni De Fraja and Catherine Waddams, Regulation and Access Pricing in Privatised Utilities: Comparison of Regulatory Régimes, Scottish Journal of Political Economy. 46, 1999, pp. 1-16. (Appendix)
Abstract
Regulators of British utilities enforce price cap regulation on part of the monopolist's revenue and are enjoined to encourage entry and competition in the uncapped sector; such entry depends on the competitors' access to the monopolist's network. The regulator may determine prices in the capped and access markets separately or may make the price cap explicitly dependent on entry in the uncapped market. We show the surprising result that sometimes the regulator may induce higher welfare by allowing the incumbent to choose the price of access to the network.
Gianni De Fraja, Regulation and Access Pricing with Asymmetric Information, European Economic Review, 43, 1999, pp. 109-134.
Gianni De Fraja, After You Sir. Sequential Investment as a Solution to the Hold-up Problem, Games and Economic Behavior, 26, 1999, pp. 22-39.
1998
Gianni De Fraja and Elisabetta Iossa, Price Caps and Output Floors: A Comparison of Simple Regulatory Rules, Economic Journal, 108, 1998, pp. 1404-1421.
Abstract
We study in this paper a simple alternative to price cap regulation. The mechanism, which we label "output floor" regulation, requires the regulated firm to supply a given level of output. This rule is as simple as price cap regulation, and performs identically when the regulated firm is a natural monopoly; however, we show that, in the presence of a competitive fringe, output floor regulation yields lower prices and stronger incentives for cost reduction. Its introduction, however, is likely to be resisted by the industry, since it lowers managerial utility and shareholders’ profits.
Gianni De Fraja and Mariella M. Cabizza, Quality Considerations in Auctions for Television Franchises, Information Economics and Policy, Special Issue on Media and Multimedia Economics, 10, 1998, pp. 9-22.
Abstract
A model of an auction for a television franchise is developed for the case in which the seller of the licence is concerned with the quality of broadcast programmes. Quality is costly to produce. We found that asymmetry of information between the authority and firms affects the quality of programmes broadcast and also the franchise. Moreover, with few bidders the franchise may be awarded to a firm who does not have the lowest bid. This effect is reduced by the increase in the number of bidders.
Gianni De Fraja and Flavio Delbono, Alternative Strategies of a Public Firm in Oligopoly, in: Anindya Sen (ed.) Industrial Economics, Oxford University Press, Delhi, 1998, pp 491-503; reprint of: Alternative Strategies of a Public Firm in Oligopoly,Oxford Economic Papers, 41, 1989, pp. 302-311.
1997
Gianni De Fraja, Pricing and Entry in Regulated Industries: The Role of Regulatory Design, Journal of Public Economics, 64, 1997, pp. 259-278.
Gianni De Fraja, Entry, Prices, and Investment in Regulated Industries, Journal of Regulatory Economics, 11, 1997, pp. 257-270.
1997-2003 2004-forthcoming Full list of publications